Mail Stop 04-07 May 13,
2005
Via U.S. Mail and Fax (212) 626-4120
Donald J. Frickel, Esq.
General Counsel
WorldSpace, Inc.
2400 N Street, N.W.
Washington, D.C. 20037
Re: WorldSpace, Inc.
Form S-1
Filed April 13, 2005
File No. 333-124044
Dear Mr. Frickel:
We have reviewed your filing and have the following
comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree with any of our comments, we
will
consider your explanation as to why our comment is inapplicable or
a
revision is unnecessary. Please be as detailed as necessary in
your
explanation. In some of our comments, we may ask you to provide
us
with supplemental information so we may better understand your
disclosure. After reviewing this information, we may or may not
raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
General
1. We encourage you to file all exhibits with the next amendment
to
your Form S-1 or otherwise furnish drafts of the legality opinion
and
the underwriting agreement. We may have additional comments upon
review of those documents. Please also file the proper consent
upon
the filing of the legality opinion.
2. We note that you plan to standardize your employment agreements
with your executive officers prior the completion of this
offering.
Please file all material employment contracts between WorldSpace
and
management as soon as possible so we may review those documents.
We
may have further comments upon the filing of the agreements.
3. We note a number of blank spaces throughout your registration
statement for information that you are not entitled to omit under
Rule 430A, such as the anticipated price range. Please note that
we
may have additional comments once you have provided this
disclosure.
Therefore, please allow us sufficient time to review your complete
disclosure prior to any distribution of preliminary prospectuses.
4. We note that you include industry research for estimated growth
data and other figures cited throughout the document, such as
those
provided by GreyStone Communications, the Yankee Group, J.D. Power
and Associates, and the National Council of Applied Economic
Research, among others. Please provide us with marked copies of
any
materials that support these and other third party statements
cited
in the registration statement, clearly cross-referencing a
statement
with the underlying factual support. Confirm for us that these
documents are publicly available. To the extent that any of these
reports have been prepared specifically for this filing, file a
consent from the party.
5. Comments on your application for confidential treatment will
follow under separate cover. Since the application review process
often results in significant revisions to the disclosure in the
prospectus, we suggest that you wait to circulate a preliminary
prospectus until you have received comments on your application.
We
will not consider a request for acceleration of effectiveness of
the
registration statement until we resolve these comments.
Prospectus Summary, page 1
6. Revise your disclosure throughout to remove unnecessary defined
terms. In this regard, please delete the fourth sentence of the
introductory paragraph on page 1. Once you make your disclosure
clear from the context, you will not need to define terms such as
"WorldSpace," "Company," "we" "us," and "our."
7. With a view toward more balanced disclosure in your summary
section, move to the front of the summary section a discussion of
the
following:
* your limited access to capital;
* your accumulated deficit of $2.1 billion;
* your recent restructuring of the debt owed to Stonehouse Capital
and Yenura, including clarification of the fact that while you
eliminated all of your long-term debt (other than your new
convertible notes) as a result of the recapitalization and
restructuring transactions, you still owe approximately $1.8
billion
in long-term liabilities as a result of the Royalty Agreement
(please
also revise your discussions of your recapitalization elsewhere in
the document to clarify this fact);
* your history of net operating losses; and
* that Noah Samara will continue control the company following the
offering.
8. Please tell us in your response letter your basis for your
statement that Noah Samara "pioneered the development of
satellite-
based digital radio services."
9. Clarify what you mean by the phrase "we are able to roll out
our
subscription service on a sequential basis...."
Risk Factors, page 9
General
10. Please revise each risk factor caption so that it reflects the
risk that you discuss in the text. Currently, many of your risk
factor captions are unduly vague, such as "Our business is
international and subject to country and region risks" on page 17,
and do not discuss adequately the risk that follows. Other risk
factor captions merely state a fact about you, such as "We depend
on
key personnel" on page 16 and "We may not be able to manage rapid
growth" on page 20, or allude to a future event, such as "Future
changes to the regulations and policies..." on page 17. These are
only examples. Revise throughout to identify briefly in your
captions the risks that result from the facts or uncertainties.
Potential investors should be able to read the risk factor
captions
and come away with an understanding of what the risk is and the
result of the risk as it specifically applies to you. As a
general
rule, your revised captions should work only in this document. If
they are readily transferable to other companies` documents, they
are
probably too generic. Please revise accordingly.
11. You should pare down your risk factors section to present only
the most significant factors that make the offering speculative or
risky. Many of the risk factors are duplicative, such as:
* "Our ability to conduct our business in China..." (page 15),
"Extensive government regulation of the telecommunications and
broadcasting industries restricts our direct entry into China..."
(page 19), and "China`s economic, political and social
conditions..."
(page 24);
* "Our insurance may not cover all risks..." (page 12), and "Our
business insurance in China..." (page 25); and
* "We may incur significant delays and expense in the development
and
installation of terrestrial repeater transmitters..." (page 13),
"We
may be unable to obtain the licenses required to operate our
terrestrial repeater networks in India...," and "We may experience
delays and incur significant costs in the development and
production
of our receivers" (page 14).
Other risk factors speak to generalities rather than specific
risks
or overwhelm the reader with a wash of information, such as:
* "There may not be sufficient demand for our service to allow us
to
become profitable" (page 9), "Our satellites have a limited life
and
may fail in orbit" (page 11), "We have faced in the past, and may
face in the future, challenges and constraints in obtaining
financing" (page 16), "Our technology may become obsolete," (page
17), and "Our business is international and subject to country and
region risks" (page 18).
12. Please avoid the generic conclusion in the captions and
discussions that if a risk occurs, your business and financial
performance could be materially adversely affected, and generic
statements in your risk factors that you cannot predict, cannot
guarantee, and that there is no assurance that a risk will not
occur.
These statements do not represent meaningful disclosure. Instead,
revise to provide specific disclosure of the possible impact upon
your operating results, business, liquidity, cash flow, financial
condition, and share price.
13. Please revise to include a risk factor discussing the fact
that
you have accepted risk of loss for one of your two satellites on
the
ground before it has been launched. Discuss the risks of losing
the
satellite during launch, the specific impact that would have on
your
financial results, the impact loss of that satellite would have on
your goal to replace the defective AfriStar satellite, and how the
loss would affect your goal to offer satellite radio to Northern
Africa and Western Europe. Please also discuss these issues in
the
relevant subsections of Management`s Discussion and Analysis.
We operate with very limited staffing of accounting
functions..., page 10
14. Revise this risk factor`s caption to clarify that you have
material weaknesses in your internal controls that may (or will)
impact your ability to comply with the internal controls
requirements
imposed upon reporting companies.
Our insurance may not cover all risks of operating our
satellites, page 12
15. You state that you intend to acquire in-orbit insurance
coverage
on your AfriStar satellite by the end of April 2005. In Note B of
your Consolidated Financial Statements on page F-10, however, you
discuss a $6.5 million insurance claim that you later withdrew.
Please clarify when your AfriStar satellite was covered by
insurance
and when that coverage lapsed. Furthermore, what effect is the
reported anomaly expected to have on your ability to insure the
AfriStar satellite?
Allegations of ties between certain of our former investors,
page 26
16. Revise the caption to the risk factor to state that there are
allegations of ties between Al Qaeda and investors (not former
investors) in your company.
17. In light of the numerous restrictions the agreements with
Yenura
and Stonehouse place upon WorldSpace`s expenditures, disposition
of
assets, and other aspects of your company`s business, clarify that
while Yenura and Stonehouse do not have voting control over
WorldSpace, they do have control over your company because they
have
the indirect power to direct or cause the direction of the
management
and policies of WorldSpace.
18. Disclose that Mr. Idris owned a factory in Sudan that was
bombed
by the U.S. in retaliation for possible terrorist ties.
Use of proceeds, page 32
19. To the extent possible, please revise to more specifically
identify and quantify the amount of proceeds to be used for
particular purposes, including the order of priority of those
purposes. For example, how much of your proceeds will be used
towards the build-out of the terrestrial repeater network?
Finally,
disclose how you expect to allocate the net proceeds of the
offering
if the underwriters exercise their over-allotment option, to the
extent practicable.
Dilution, page 34
20. Please quantify the further dilution to new investors that
will
occur assuming the exercise of all of your outstanding stock
options
and warrants. Also quantify the dilution to new investors if your
underwriters fully exercise their over-allotment option.
Management`s discussion and analysis, page 37
General
21. Discuss what steps, if any, the company is taking to remediate
the material weaknesses in its internal control over financial
reporting.
Revenue, page 40
22. Explain why you expect receiver sales to decline as a
percentage
of total revenue. We note your risk factor relating to offering
receivers at reduced cost. Discuss whether you intend on
providing
receivers free to potential customers as incentives to subscribe,
and, if so, what is the expected impact to your cost of revenue.
Operating expense overview, page 40
23. Discuss whether you expect your depreciation and amortization
expenses to increase materially as a result of the defect
associated
with your AfriStar satellite.
24. Describe for us the nature of the sales incentives to your
distribution partners and how you subsidize the cost of the
receivers
as described at pages 64 and 73.
25. In addition, tell us how you are accounting for these
incentives.
In your response, tell us how you considered the guidance in EITF
01-
09.
Liquidity and Capital Resources, page 51
26. Identify and quantify the "several one-time corporate
expenses."
27. Clarify whether you expect construction on your F4 satellite
to
be restarted.
28. Disclose the likely impact the Stonehouse royalty payments
could
have on your financial condition and results of operations. In
addition, please discuss management`s financial options in the
event
that the cash generated by operations is not enough to fund the
reserve account when the forecasted EBITDA is positive or the
annual
payment is due.
29. Disclose the estimated amount of capital expenditures required
for the build-out of the terrestrial repeater network in China
during
the next twelve months and the estimated total expenditures to
complete the network.
Contractual Obligations, page 55
30. Because your royalty payments are reported as a long-term
liability on your balance sheet for the December 31, 2004 fiscal
year
end, please include the estimated amount of contingent royalty
payments you expect to pay. We note that the value of your
Contingent Royalty Obligation reported on your balance sheet is
$1,814,175,000.
31. Clarify that your convertible notes are payable in full at the
option of the holder after 3 years.
Business, page 57
General
32. You do not discuss your operations in Africa and the Middle
East
even though your AfriStar satellite primarily covers those areas.
In
addition, it is not clear how many of your 53,000 paying
subscribers
reside in those areas. Clarify where, other than India, your
paying
subscribers reside. Please expand your Business section to
discuss
your operations in Africa and the Middle East.
Government Regulation, page 86
33. Please consider creating a risk factor discussing the risk
arising from the lack of mandatory dispute resolution or
enforcement
mechanisms at the International Telecommunications Union. For
instance, we note that while the use frequencies of your AfriStar
and
AsiaStar satellites are registered in the Master International
Frequency Register maintained by the International
Telecommunications
Union, there is no guarantee that your use of those frequencies
would
be protected from interference from non-conforming uses by other
nations.
Executive Compensation, page 100
34. We note your statement that Donald J. Frickel was recipient of
stock options for the prior fiscal year, yet there is no summary
compensation table disclosure nor stock option grant table
disclosure. Please revise accordingly. Furthermore, we note that
you recorded $90.3 million in stock compensation expense in 2004.
Provide more detail as to why you had such a significant stock
compensation expense in 2004 when the only named executive officer
to
whom you granted options was Mr. Frickel.
Pre-offering recapitalization, page 103
35. We note your description of the merger between your principal
operating company and former holding company. Please describe the
merger in your response. Tell us about the business purpose of
the
merger and how the merger fit into your recapitalization and
restructuring.
Underwriting, page 129
36. You state that "certain of the underwriters or securities
dealers
may distribute prospectuses electronically." Identify in your
response letter any members of the underwriting syndicate that
will
engage in any electronic offer, sale or distribution of the shares
and describe their procedures to us. If you become aware of any
additional members of the underwriting syndicate that may engage
in
electronic offers, sales or distributions after you respond to
this
comment, promptly supplement your response to identify those
members
and provide us with a description of their procedures.
Briefly describe any electronic distribution in the filing.
Also, tell us how your procedures ensure that the distribution
complies with Section 5 of the Securities Act. In particular,
please
address:
* the communications used;
* the availability of the preliminary prospectus;
* the manner of conducting the distribution and sale, such as the
use
of indications of interest or conditional offers; and
* the funding of an account and payment of the purchase
price.
Alternatively, to the extent that our Division has reviewed your
procedures, please confirm this and tell us if you have changed or
revised your procedures subsequent to our clearance.
Further, tell us whether you or the underwriters have any
arrangements with a third party to host or access your preliminary
prospectus on the internet. If so, identify the party and the
website, describe the material terms of your agreement, and
provide
us with a copy of any written agreement. Provide us also with
copies
of all information concerning your company or prospectus that have
appeared on their website. Again, if you subsequently enter into
any
such arrangements, promptly supplement your response.
Finally, tell us whether any members of the selling group have
made
copies of the preliminary prospectus available over the internet.
If
so, tell us when. If not, tell us if they intend to do so. In
this
regard, note that we would consider this posting a circulation of
the
preliminary prospectus.
No Sales of Similar Securities, page 130
37. You state that UBS Securities LLC may release the securities
from
the restrictions contained in the lock-up agreement at any time
without public notice. Revise to disclose what factors the
underwriters will use in any determination to release the shares
subject to the lock-up, and indicate any current intention to
release
those shares. Furthermore, disclose how many shares are subject
to
the lock-up.
Directed Share Program, page 132
38. We note that you plan to reserve shares for directors,
officers,
employees, strategic partners, other individuals associated with
you,
and members of their families. Please describe in your response
letter the mechanics of how and when these shares were or will be
offered and sold to investors in the directed share program for
this
offering. For example, tell us how the prospective recipients and
number of reserved shares are determined. Tell us how and when
the
issuer and underwriter notified or will notify the directed share
investors, including the types of communications used. Discuss
the
procedures these investors must follow in order to purchase the
offered securities, including how and when any communications are
sent or received or funds are received by the underwriters or you.
How do the procedures for the directed share program differ from
the
procedures for the general offering to the public? Provide us
with
copies of all written communications with prospective purchasers
about the directed share program.
Consolidated Statements of Operations, F-4
39. Disclose separately the revenue and cost of revenue generated
by
the sale of the receivers. Refer to Rule 5-03 of Regulation S-X.
40. It appears that the caption "Cost of Revenue" and "Gross Loss"
excludes depreciation for property and equipment that is directly
attributed to the generation of revenue. If this is true, revise
your presentation to include the applicable depreciation in the
calculation of "Gross Loss". Also identify the amount of
depreciation that is excluded from Cost of Revenue as required by
SAB
Topic 11: B.
41. If a portion of stock-based compensation is attributed to
employees whose services are included as a component of cost of
revenue, revise your presentation to include the applicable amount
of
stock-based compensation in the calculation of "Gross Loss".
Revenue recognition, page F-8
42. We refer to your disclosure that revenue from the sale of
satellite radio receivers is recognized when the product is
shipped.
Tell us why is it appropriate to recognize revenue when shipped?
In
addition, tell us if there are any rights of return or potential
warranty costs that need to be recognized.
Recent Accounting Pronouncements, page F-12
43. Update your disclosure to address the impact, if any, of the
adoption of FIN 46R. Also clarify whether you identified any
variable interest entities and provide the disclosures required by
paragraphs 23 through 25 of FIN 46(R), if applicable.
Satellites and Related Systems, page F-10
44. We refer to the impairment of certain ground system assets for
$3.6 million. Describe for us how you determined the asset group
or
groups for testing for impairment. In this regard, we note your
disclosure of the WorldSpace System at page 77 in which you state
that the system is comprised of three major components: the space,
the ground and the user segments. In addition, confirm whether
the
impairment charge resulted in the revision of the depreciation
estimate of the asset group(s). Refer to paragraphs 4 and 10 of
SFAS
144.
45. Tell us how you determined the fair value of your asset group
or
groups. Refer to paragraphs 22 - 24 of SFAS 144.
46. Disclose in the notes to the financial statements the facts
and
circumstances leading to the impairment. Also disclose the method
you used to determine the fair value of the asset group. Refer to
paragraphs 8 and 26 of SFAS 144.
Note C - Debt
Conversion of Debt to Equity, page F-15
47. You disclose that you determined the number of shares to issue
for the conversion of notes held by Yenura based on "the
conversion
price stated in the promissory notes or based upon a negotiated
conversion rate." Describe for us the circumstances where you
decided to use a negotiated rate. Also discuss whether these
exchanges involved an induced conversion of debt and, if so, how
you
applied the guidance in SFAS 84 or other relevant accounting
literature.
Note K - Stock Options and Warrants, page F-20
48. Describe for us the methodology and significant assumptions
you
used to determine the fair value of the common stock underlying
the
WSI options at the date you measured compensation expense
attributed
to the conversion of WIN options. We may have additional
comments
when the estimated offering price of Class A common stock is
included
in the document.
Age of Financial Statements
49. Update the financial statements and other financial
information
in the filing as required by Rule 3-12 of Regulation S-X.,
* * * *
Please amend your Form S-1 in response to these comments.
You
may wish to provide us with marked copies of the amendment to
expedite our review. Please furnish a cover letter with your
amendment that keys your responses to our comments and provides
any
requested supplemental information. Detailed cover letters
greatly
facilitate our review. Please understand that we may have
additional
comments after reviewing your amendment and responses to our
comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the Company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures that
they have made.
Notwithstanding our comments, in the event the company
requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such
request,
acknowledging that:
* should the Commission or the staff, acting pursuant to delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
* the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the company from its full responsibility for the adequacy
and
accuracy of the disclosure in the filing; and
* the Company may not assert this action as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in connection with our review of
your
filing or in response to our comments on your filing.
We will consider a written request for acceleration of the
effective date of the registration statement as confirmation of
the
fact that those requesting acceleration are aware of their
respective
responsibilities under the Securities Act of 1933 and the
Securities
Exchange Act of 1934 as they may relate to the proposed public
offering of the securities specified in the above registration
statement. We will act on the request and, pursuant to delegated
authority, grant acceleration of the effective date.
We direct your attention to Rules 460 and 461 regarding
requesting acceleration of a registration statement. Please allow
adequate time after the filing of any amendment for further review
before submitting a request for acceleration. Please provide this
request at least two business days in advance of the requested
effective date.
You may contact Al Rodriguez, Staff Accountant, at (202)
551-
3370 or Terry French, Accountant Branch Chief, at (202) 551-3828
if
you have questions regarding comments on the financial statements
and
related matters. Please contact Derek Swanson, Staff Attorney, at
(202)551-3366, or me at (202) 551-3810 with any other questions.
Sincerely,
Larry Spirgel
Assistant Director
cc: Jeffrey E. Cohen, Esq.
Coudert Brothers LLP
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Mr. Donald J. Frickel, Esq.
WorldSpace, Inc.
May 23, 2005
Page 1 of 12
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
DIVISION OF
CORPORATION FINANCE